How TD Power Systems Suppressed Material Facts In 2011 IPO
A 24-year-old secret shareholder agreement between the promoters of TD Power Systems has made the company a case study in India's regulatory and financial markets. After the whistleblower revealed the details of the hidden shareholder agreement, proxy advisory firm InGovern wrote to market regulator Sebi on 3 October, seeking an investigation into the matter.
Nearly 14 years after the IPO of TD Power, the public shareholders of the company have only come to know this year that the original promoters remained hidden behind a fronting deal.
The last big case of suppression of material facts in IPO documents involved one of India's largest real-estate companies DLF, where the complainant Kimsuk Krishna Sinha fought a long battle pushing the regulator to take note and pass an order. DLF had come out with its mega IPO in 2007 and the fight to prove that the company had deliberately omitted and suppressed vital information from the public took Sinha nearly a decade.
In the matter involving TD Power Systems, InGovern has said that the company suppressed facts concerning a shareholder agreement and did not disclose that the company's chairman and non-executive director Mohib Khericha (MK) and his family members and trust linked to him were just a front entity for businessman Vijay Korloskar (VK), who was the original promoter of the company.
TD Power IPO had hit the markets in 2011 and details of the clandestine but material information regarding the agreement came to light only this year after an anonymous whistleblower blew the lid. As per regulatory requirements, IPO fundraising documents should have all the disclosures that are material. How can a shareholder agreement that can affect the share price and company's prospects not be a material fact?
Citing the clauses of the confidential agreement, InGovern has said that VK stepped down from the board of TD Power and also transferred his holdings to MK, since the company was not able to raise money due to financial troubles faced by his other company Kirloskar Electric Company then. There was an arrangement between VK and MK and the latter would front for VK so that TD Power could raise funds with much hassle. In June 1999, VK stepped down from the company's board in specific circumstances and proposed the board of TD Power nominate MK as a director.
In 2011, seven months prior to the IPO, NK who was then the company's joint managing director and MK the chairman entered into another agreement to terminate the old shareholder arrangement entered into between them. Even this fact remained hidden from the public up to July 2023.
"The shareholding pattern of a company and the names of its promoters are crucial information which a potential investor considers/evaluates prior to making an investment decision. It is most pertinent to note that potential investors would have invested in the shares of TD Power during its IPO, were misled about the true and correct facts and there was a deliberate and premeditated lack of transparency regarding the contents of the IPO for ulterior reasons," InGovern told Sebi in its letter.
Sebi laws call for penalties and other action against the company and its officials who were involved in suppressing the facts. Also, the case can be tried under the criminal procedure code for fraud and breach of investor trust, experts say.
"It is incumbent upon the exchanges and Sebi, as custodians of the interest of public shareholders, to ensure transparency in the market. Hence, the case IPO Prospectus of TD power needs to be forthwith investigated and appropriate corrective action be taken in accordance with applicable laws, regulations and judgements," InGovern has said in its letter.
Both VK and MK fought when MK tried to sell a huge chunk of his shares in TD Power worth several millions. When the matter reached the Karnataka High Court, Justice S R Krishna Kumar passed an interim order on a petition filed by VK restraining MK from the transfer/alienation of 2.51 crore shares of the company through which he was to gain around Rs 555 crore. VK told the court that in February 2001, pursuant to an agreement, the shares held by him and other petitioners close to him were transferred to MK, a close family friend, without receiving any consideration.
The ball is now in Sebi's court since the losers in the battle are TD Power shareholders. The company has a market capitalisation of around Rs 4,000 crore and a case study in legal circles now.
"We hence respectfully submit that, having regard to the public interest, this is a matter which merits your immediate and close attention and a detailed investigation," InGovern has stated in its letter to Sebi.
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